On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that will prevent employers from enforcing non-competes against nearly all employees. Employers nationwide who have existing non-compete agreements with their employees are required to provide notice to such employees that these existing non-competes will be unenforceable.
For additional information regarding FTC's final rule, and to find out how this could impact your business, please contact our Managing Partner, Richard Liu, at richard.liu@consultils.com.
Background
On January 5, 2023, the FTC announced and made public its notice of proposed rule making regarding the Non-Compete Rule, including its request for public comment on all aspects of the proposed rule. The proposed rule was initially subject to a 60-day public comment period, but the FTC allowed a 30-day extension in response to interested parties’ request. The agency received more than 26,000 comments on the proposed rule, with over 25,000 comments in support of the FTC’s proposed ban.
After 15 months of the announcement, the FTC approved the final rule in a special Open Commission Meeting. The final rule will be effective as of 120 days from its publication in the Federal Register (“Effective Date”).
The Final Non-Compete Clause Rule
1. Regarding new non-compete clauses after the Effective Date:
According to the final rule, companies and individuals are prohibited from entering into or enforcing a new “non-compete clause” with “workers” on or after the Effective Date.
Non-compete clause is defined as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
A “worker” under the final rule is “a natural person who works or who previously worked”, regardless of whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.
2. Regarding existing non-compete clauses:
The final rule does not require companies and individuals to legally modify existing non-competes by formally rescinding them. Instead, it requires them to provide a “clear and conspicuous” notice by the Effective Date to workers that their existing non-competes will not be enforceable against them.
The notice must identify the employer who entered into the non-compete and must be delivered on paper by hand to the worker, by mail to the worker’s last known personal street address, by email at an email address belonging to the worker, or by text message at a mobile telephone number that belongs to the worker. To facilitate compliance and minimize burden, the final rule includes model language that satisfies this notice requirement.
Senior Executives Exception
Non-compete agreements entered into before the Effective Date with senior executives can still remain in force after the Effective Date. Senior executives are defined as workers earning more than $151,164 annually who also are in a “policy-making position.”
State Regulations
Non-compete agreements have long been a contentious issue in employment law and states may have enacted their own legislation in the past. The final rule does not limit or affect enforcement of state laws that restrict non-competes where the state laws do not conflict with the final rule, but it preempts state laws that conflict with the final rule.
For additional information regarding FTC's final rule, and to find out how this could impact your business, please contact our Managing Partner, Richard Liu, at richard.liu@consultils.com.
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Richard Liu, Esq. is the Managing Counsel of ILS. He serves clients as a management-side defense lawyer specializing in employment and business litigation. Richard is also an expert on litigation prevention and compliance. He regularly advises Fortune 500 companies and startups on employment, labor, and commercial matters.
Email: richard.liu@consultils.com | Phone: 626-344-8949
*Disclaimer: This article does not constitute legal opinion and does not create any attorney-client relationship.